Sheng Siong - Time For More Dividends; Still A Top Pick - BUY

Sheng Siong's PATMI for 4Q18 was SGD17.5m, up 4% y-o-y, and SGD70.8m for FY18, up 5% y-o-y, meeting our expectations. However, we lower our FY19-20F earnings by 3-4% as a result of weaker SSSG trend as well as the change in accounting standard from FRS 17 to SFRS (I) 16, which would front load rental expenses in the earlier years of the leases.

Earnings drivers.

SHENG SIONG GROUP LTD (SGX:OV8)'s 4Q18 revenue grew 10.7% y-o-y largely driven by contributions from new stores. However, SSSG (same store sales growth) turned negative during the quarter as a result of sales cannibalisation in the sector and online competition.

Sheng Siong's 4Q18 PATMI grew only 4% y-o-y as the group incurred higher operating expenses following the opening of 10 new stores in 2018.

Lower SSSG expectation.

We flatten our SSSG forecast for FY19 as a result of a slowing GDP growth as well as intensifying competition, from the proliferation of brick and mortar supermarkets in Singapore.

Remain positive on FY19-20F performance.

The 10 new stores opened in 2018 would be in a ramp-up phase over the next two years. We expect most of these new stores to turn profitable as sales mature this year. This, together with gross margin expansion, could drive earnings growth for the next two years. We also forecast Sheng Siong to secure three new stores in FY19F.

It is time for higher dividend payout ratio.

While we maintain a FY19-21F dividend payout ratio at 72.5% (FY18 levels), we expect Sheng Siong to raise this ratio as the company generates sufficient cash flows.

Aside from the remaining SGD4m capex for the warehouse extension due this year, the group typically requires < SGD10m capex for both expansion and maintenance each year. Based on our forecast, the group would accumulate more than SGD100m in cash by end-2019, which we believe is more than sufficient for Sheng Siong Group's expansion needs.

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